SBP unveils an unsecured SME financing program


KARACHI: The State Bank of Pakistan (SBP) on Monday launched an innovative initiative to improve access to finance for small and medium enterprises (SMEs) in collaboration with the federal government with the aim of enabling businesses that do not cannot offer security / guarantees to access bank financing, a statement said on Monday.

The central bank said the initiative was named “PME Asaan Finance” or SAAF to emphasize the SME facilitation function of this program and to provide clean, ie unsecured loans to SMEs.

SAAF is a refinancing and credit guarantee facility, which has been developed through a wide-ranging consultative process and aims to help SMEs that are creditworthy but still cannot access finance, as they cannot offer the security required as collateral by banks. .

The SBP will provide refinancing to banks, while the Pakistani government will provide support through partial credit guarantees to participating banks.

This support is provided initially for three years to facilitate banks’ investments in technology, infrastructure and team building specialized in SME lending, after which SME financing by banks is expected to be sustainable without support from the EU. central bank or government.

Speaking about the unsecured loan program, Minister of Finance and Revenue Shaukat Tarin said, “The MOF [Ministry of Finance] welcomes and supports this innovative initiative of the State Bank, which would [the] SMEs to access bank financing without collateral. We look forward to seeing strong participation from commercial banks to move this initiative forward. “

The SME sector plays a central role in the Pakistani economy and the Small and Medium Enterprise Development Authority (Smeda) estimates that it contributes 40 percent of GDP and 25 percent of export earnings.

However, despite this, SMEs are struggling to access formal bank finance, as SME finance stood at Rs 444 billion as of March 31, 2021, which is only 6.6% of total private sector credit. .

This is due to several reasons, including relatively higher loan losses, high cost bank financing models, low use of the appropriate technology needed to finance SMEs, and the lack of acceptable security.

SMEs; as a result, often turn to exorbitant informal credit and face barriers to growth. The majority of informal sector SMEs that lack collateral currently borrow in cash or in kind at rates of 25 percent or more. This program is mainly aimed at these SMEs.

To overcome these challenges, the State Bank has taken a new and innovative approach to address both SMEs and banking issues. The central bank will provide refinancing only to banks that wish to specialize in lending to the SME sector.

Interested banks will be selected through a transparent bidding process to offer concessional refinancing facilities, which would also include partial risk coverage from the Pakistani government.

Banks winning through this bidding process will need to invest in human resources, technology and processes to successfully develop the expertise and ability to attract the SME financial market. To participate in SAAF, interested banks will submit Expressions of Interest (EoIs) to the SBP to build their SME loan portfolio during the program’s three-year validity period.

Banks with the largest portfolio size and the largest number of borrowers will be selected to participate.

The State Bank will encourage banks that partner with Fintechs to provide an opportunity for innovative financing techniques in a cost effective manner.

Under this program, the central bank will provide refinancing for three years to the selected banks. After three years, the refinancing will be repaid by the banks in 10 equal annual installments.

The selected banks will benefit from SBP refinancing at 1% per annum and will extend financing to SMEs at the end-user rate of up to 9% per annum, which is very attractive compared to informal financing costs.

Under SAAF, all SMEs that are new borrowers from a bank will be eligible for financing of up to Rs 10 million. Unsecured (own) financing will be available to SMEs for long-term fixed capital investments and working capital financing needs.

Sharia-compliant Islamic financing methods, as well as conventional ones, will be offered. The device will be available to SME borrowers towards the end of September 2021.

An interesting feature of the program is that the Pakistani government will provide 40 to 60 percent risk coverage to selected banks against losses, depending on the size of the loans.

This risk coverage will be 60 percent for small loans up to Rs4 million; 50% for medium-sized loans over Rs4 million to Rs7 million and 40% for relatively large loans of Rs7 million to Rs10 million.

This initiative is expected to enable sustainable growth in SME finance, as it aims to address the fundamental issues facing this important sector.

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